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A shareholders’ agreement definition states that it is a contract between the shareholders of a company and the company (to which the company is also usually a party) that defines the rights and responsibilities of the parties to the agreement over and above those provided by company law. The agreements provide for an arrangement that regulates the relationship between the shareholders, the management of the company, ownership of the shares, rights, obligations, and protection of the shareholders. It may also command the way in which the company functions.
Some of the issues covered in the shareholder agreement include dealing with restrictions on transfer of shares (right of first refusal, right of first offer), appointment of nominee directors for representation on boards, quorum requirements, veto or supermajority rights available to certain shareholders and obligations and protection of the shareholders.
Protection of Rights
SHA provides protection of rights of the Shareholders.
Clarity of Role and Responsibilities
It clearly defines the different roles and responsibilities of the Shareholders
Minimisation of Disputes through predetermined dispute resolution procedures hereby saving money, time, and energy.
Protection to Minority Shareholders
It takes the role of a shield in protecting the interest of the minority shareholders against potential market risks.
Segregation of roles between Management and Shareholders
It defines and regulates the relationship between the management of the company and its shareholders
Binding only on Parties
It is binding only on the parties to the Agreement, as it is a contractual arrangement between the parties.
Prohibition of Transfer
Prohibits minority shareholders from transferring their shares to competitors or other parties.
A shareholders agreement is a legally enforceable agreement that defines the relationship between shareholders and identifies who runs the firm. It determines, how a Company will be operated, how shareholders' interests may be safeguarded, how shareholders can leave the business and so on.
The shareholders agreement specifies a shareholder's ability to choose directors. By electing directors to the board, a shareholder can have an active or passive role in the management of the organisation. The shareholders agreement also specifies the board's procedures, including when, how, and who must attend board meetings.
The subjects that are reserved for the board and those that require shareholder approval should be specified in the shareholders agreement. Additionally, it will specify the percentage of votes needed to pass a specific resolution. As a general rule, the board should be in charge of running the business, while shareholders should make decisions on issues that are extremely important or vital to the business.
In order to be bound by the shareholders agreement and be included as a shareholder in the company's register, a new party must enter into a "Deed of Accession" with the company and all current shareholders if the firm issues additional shares
The company, the new shareholder, and all current shareholders execute a Deed of Accession in which the new party consents to be bound by the shareholders agreement.
This indicates that there won't be a need to revise the shareholders agreement if the new stakeholder is content to be bound by the provisions of the current shareholders agreement.
Limitations on the sale or transfer of shares
A shareholder may transfer, sell, or assign their shares to third parties only as permitted by the terms and conditions set forth in the shareholders agreement. For instance, a clause might provide that a shareholder can't sell or transfer any of its shares without first receiving written agreement from all other shareholders. By doing this, existing shareholders are prevented from co-owning a corporation with an unidentified third party.
“Pre-emptive” rights clause are also often found in shareholder agreements. These clauses can stop third parties from acquiring shares before the current shareholders have had a chance to do so. This enables shareholders to confirm that the same group of owners still owns and runs the business.
Drag Along and Tag Along Rights
Shareholders agreements often also contain ‘drag along’ options and ‘tag along’ options (as outlined below). While these restrict the sale of shares to third parties, they may be relied upon to attract a higher purchase price for the shareholders.
Drag along options: This clause gives majority Shareholders who want to dispose their shareholding to an unrelated third-party, a right to force the remaining minority shareholders to dispose their shares on pre-determined terms as well.
Tag-Along Rights: This clause is used to protect the minority shareholders of the Company. Thus, if majority shareholders want to dispose their stakes in the Company, it gives the minority shareholder the right to join the transaction and dispose their minority stake in the Company as well.
Shareholder agreements typically include clauses describing how and when shares may be sold or transferred, as well as how and when the relationship between shareholders may cease. This relationship may occasionally dissolve as a result of an "Exit Event."
The sale of a significant portion of the company's stock or assets, a merger with or acquisition by another business, the company ceasing operations and selling off its assets, and an initial public offering (IPO), in which the company's shares are listed on the stock exchange, are examples of common exit events. The shareholders agreement will often cover the possibility of departure events, the implications for shareholders, and how to calculate the price of shares in the event of a transfer or an IPO.